Product Tips and Insights

How do application development firms really come up with their estimates?

You are likely going to get a couple of proposals to develop your application. We recently started a web application with a client that received three proposals during their search for a development company. The proposals they received varied by 100 percent. How is it possible that one firm estimated the project at $20,000 and another at $200,000, when both firms were working from the same set of application scope and requirements?

There are multiple factors that come into play when a development firm provides you an estimate or proposal. Certainly the biggest factor is the size and scope of the application, but if we assume you are providing the same set of information around the application to all firms you are considering, then it really comes down to each firm’s perspective around some key aspects of the project, and their own business needs.

The factors that really determine a development firm’s proposal process are:

1. Effort Required. Based on what a development firm understands the size and scope of the application to be, they will estimate how long it will take for them to complete the project. Typically, the number of people multiplied by the number of hours each person will be working on the project equals the project’s total hours. If you’re approaching several development firms, expect to see price differences because each firm is probably seeing the size and scope of the project slightly differently, and they are correlating that back to the size of their project team. The velocity or pace of their work on the project also greatly affects their price. One development firm might be proposing one person for six months where another firm is proposing six people for one month.

2. Experience & Expertise. A big factor in the project team and project velocity from above is a development firm’s experience and expertise with the type and scope application you want to develop. Development firms will assess how the project aligns with their experience and capabilities. If the project is in their wheelhouse, they have a much better grasp of how to develop the application and the associated effort. You could consider this a confidence weighting. When a development firm is confident in their ability to deliver, they don’t need as much room to mitigate risk and to account for time they will need to spend learning.

However, if the project doesn’t align with their experience, expertise and capabilities very well, they tend to account for more hours of work in order to mitigate their risk and account for a learning curve. In this case their confidence weighting is going to be high, which will increase the price of their proposal. You can think of it this way: when you know how you will do something, you are better at estimating how long it will take to do it. When you have to figure things out along the way, you have to account for the lack of know-how.

An important point in this context is that expertise is as important as experience, if not more so. We recently engaged with a library on a website project. One of the reasons they engaged with us is because we have the expertise to create a next generation site so they won’t look like and have the functionality of all the other, inadequate library sites. They considered other development firms that have developed library sites, but just the experience of doing library sites didn’t give them the expertise to develop a new level of library site. Be sure to balance expertise and experience. Experience is good. The ability to apply expertise is better.

3. Profit Margin. All development firms are in business to make a profit developing applications for clients. How much profit each firm wants to make on your project is a significant driver of their proposal to you.

The profit a development firm wants to make on your project probably depends on their current project workload and mix. In other words, development firms will markup a project more or less based on their financial need for the project. You can typically sense when a development firm is desperate for a project and pricing accordingly. In the example referenced above of a client getting proposals valued at both $20,000 and $200,000, you can surmise with some certainty that the development firm at the low end is low-balling the project because they need the work, and the one on the high end is charging a premium. We’ve also seen proposal pricing with the opposite reasoning. Where the highest priced proposal is from a development firm that needs the work and also needs to make up for time when they haven’t had their entire team busy. If a development firm is trying to make up for lost time, then they might need to price high in hopes of being able to have your project fill their financial gap.

By the way, our proposal for this project was $62,000 and the client engaged with us. The client didn’t engage with us just because we had the most reasonable price, but when married with our experience, expertise and process, it made the most sense.

In summary, you can provide the same application scope and requirements to multiple development firms and get vastly different proposals because each development firm applies their own combination of effort, expertise and business needs to their proposal. Ultimately you are probably best served by choosing the development firm that has the expertise to help you realize the business outcomes you desire from the application.

Author

Ryan Frederick
Ryan Frederick has had the privilege of being part of several startups and growth companies. He has helped companies grow from inception, to viability, through to sustainability. During the evolution of these companies, Ryan as served on company boards and been instrumental in capitalization activities. He has also helped companies to expand to international markets.
Ryan brings a unique blend of business acumen and technical knowledge to help companies and clients achieve their objectives. He enjoys the process and challenge of starting and growing a company. Ryan (@ryanfrederick) is a Principal at AWH (@awhnet), Director for Startup Grind (@startupgrind | @startupgrindcmh), Chairman i.c.stars|*COLUMBUS (@icstarscolumbus), Co-founder (@black_hack) and leader ProductCamp & ProductTank Columbus.